Moody’s, Fitch may downgrade $1.8 bn fraud-hit PNB

New Delhi: Already reeling under $1.8 billion fraud blow, the Punjab National Bank (PNB) on Tuesday got another shock from two top rating agencies Moody’s and Fitch who are mulling to downgrade the bank’s ratings.

Moody’s Investors Service placed under review for downgrade PNB local and foreign currency deposit rating

Fitch Ratings has placed PNB Viability Rating of ‘bb’ on Rating Watch Negative (RWN), following the $1.8 billion fraud detected in the bank, an official statement said here on Tuesday.

Moody’s Investors Service placed under review for downgrade PNB local and foreign currency deposit rating of Baa3/P-3 and foreign currency issuer rating Baa3, an official statement said.

Fitch clarified that it would resolve the Rating Watch once more clarity emerges on the extent of control failures and the impact on PNB’s financial position.

“At this stage, Fitch does not view this event to have an impact on PNB’s Support Rating Floor (BBB-) due to the bank’s high systemic importance as the second-largest state-owned bank. We believe that the state’s propensity to provide extraordinary support to PNB remains high, subject to the sovereign’s ability, which is captured in India’s sovereign rating of ‘BBB-‘,” Fitch said.

PNB, the second largest public sector bank in India, had detected a $1.8 billion fraud in one of its branches in Mumbai in January. The amount of fraudulent transactions is equivalent to eight times the bank’s net income of about Rs 1,320 crore ($206 million).

“The RWN reflects the possibility of a downgrade of PNB’s Viability Rating following the detection of a large fraud in one of the bank’s branches amounting to $1.8 billion. While the exact financial impact from this event is still being ascertained, it has raised questions on both internal and external risk controls as well as the quality of management supervision considering that the fraud went undetected for several years,” the rating agency said.

“Significant control failures that attract substantial management time to rectify would be likely to weaken our view of risk appetite and management, and result in a downgrade of the viability rating (VR),” it said.

Moody’s said “likely financial impact of the fraudulent transactions is the key driver for the review for downgrade.”

At the same time, Moody’s has placed the bank’s Baseline Credit Assessment (BCA) and adjusted BCA of ba3 and the Counterparty Risk Assessment (CRA) of Baa3(cr)/P-3(cr) under review for downgrade.

Moody’s said the review for downgrade will focus on: the timing and quantum of the financial impact of the fraudulent transactions; any management actions taken to improve the capitalisation profile of the bank, and any punitive actions taken by the regulator on the bank.

“Moody’s assumes a very high probability of government support for PNB in times of need, resulting in a three-notch uplift to its deposit and issuer ratings from its BCA. In the review for downgrade, Moody’s will also assess government support for the bank’s deposits and senior unsecured debt.”

Given the review for downgrade, Moody’s said it is unlikely to upgrade PNB’s ratings over the next 12-18 months.

“Nevertheless, Moody’s could affirm the ratings, if the financial impact of the fraudulent transactions is much smaller than what Moody’s anticipates in this rating action, and/or if the bank manages to strengthen its capital position to a level above the minimum regulatory requirements — including the capital conservation buffer — under Basel III standards, and/or the bank returns to profitability on a sustainable basis,” the statement added.